Risk management

Financial frauds and scams cost Canadians $10 billion a year. Here are six to avoid.

Last year the Canadian Anti-Fraud Centre received almost 50,000 complaints from Canadians who, combined, reported more than $50 million lost to a variety of cash-grabbing schemes. Many others aren’t even aware they’ve been scammed—the CAFC estimates fraud costs Canadians close to $10 billion annually. The Ponzi schemes of Madoff and Jones, revealed during the recession when consumers were at their most vulnerable, highlighted that people from any walk of life, including athletes, entertainers and fund managers, can be taken for a ride. So can the most trustworthy businesses, universities and institutions. In fact, one study by the Association of Certified Fraud Examiners estimates that the average company loses 5% of its annual revenue to scams, which last a median of 18 months before detection.

Since many fraud victims say that, in hindsight, they should have seen the signs of a scheme, financial literacy is important. As Ken Fisher, CEO of Fisher Investments, writes in his book How to Smell a Rat, “You, yourself, and no one else must do due diligence before handing over any sum of money….Yes, it would be nice if regulators guaranteed safety. But the truth is, as Ben Franklin said, ‘God helps those who help themselves.’” The best way for average Canadians to protect themselves from being victims is to recognize scams (like the ones below) from a distance, and sink their time and money someplace else.

High-risk Investments
Consumers are called or e-mailed and offered a “once-in-a-lifetime opportunity” to get in on the ground level of an exclusive stock or collection of luxury goods that promises wild returns. The investment then turns out to be overpriced, difficult to sell, or perhaps never even existed. Research from the U.K. suggests that three out of four victims are men, and more than a third are over the age of 65. “Right now, there are gold and silver schemes spreading like wildfire,” says Larry Elford, a former financial adviser and advocate for better investment practices in Canada.

Pyramid Schemes
Like an inflating balloon, this scheme encourages people to sign up to a “club,” pay a fee, and then, in exchange for a large commission, recruit friends or relatives to do the same. This scam is tricky, because if enough people continue to join, the growing pyramid may allow some near the top to make a quick buck. But, eventually, the supply of new recruits will run out, and those closest to the bottom get nothing when the balloon pops. While many believe sucker traps like this prey on the elderly, the CAFC’s data suggest that the 40–49 age demographic reports the most dollars lost each year. “Victims are portrayed by society as being gullible losers, so they often don’t speak up,” says Les Henderson a sales expert and consumer advocate.

Hotel Ballroom Investment Pitches
Endless low-fee seminars conducted by enthusiastic salespeople (some of them planted in the crowd) in conference centres or airport hotels promise a unique or secret investment strategy. Sometimes, participants will be asked to sign waivers agreeing that they won’t share the tip, or that organizers aren’t responsible for losses sustained. But why would someone with such a wonderful opportunity want to share it with strangers? “Before investing, make sure you can answer three questions,” says Elford. “You want to know who’s selling it. You wouldn’t buy your jewelry out a trunk of a car, but some people choose investments in that way.” Second: How is it being sold? Layers of salespeople or referral fees are not a good sign. “And last,” Elford says, “what is it they’re actually selling?”

Scholarship Hunters
The increasing cost of post-secondary education has encouraged fake scholarship companies that promise thousands of dollars in grants for relatively small fees. Of course, these companies either don’t follow through or don’t do anything the student couldn’t do with a Google search. “If you are pressured on the phone or in a pitch to make a big purchase decision immediately, it’s probably not a legitimate deal,” says Henderson. “Real businesses or charities will give you a chance to check them out or think about it.”

Runaway Real Estate
“If I had a nickel for each real estate project that wants a piece of your savings, I’d be rich,” says Elford. “It’s the most common pitch.” Consumers attend a presentation that promises wild returns on properties that have yet to be built and pay membership dues to get in on the action. Organizations that want to send the money to another country, outside the protection of Canada’s laws, are worth extra caution. As always, investors should be wary of the promise of high returns with low risk, and should run the investment past a financial adviser, accountant or lawyer (or all three) before writing a cheque. “It’s probably better to buy your own real estate where you cut the lawn,” says Elford. “That way, you manage your own risk, have input and control.”

Work-from-home Scams
Victims may find ads online or pick up flyers that promise quick cash for work that can be done by unskilled hands, usually after paying a registration fee or purchasing supplies up front. Later, scam artists claim there is no work or give a vague reason why victims will not be paid. “The would-be employer may encourage these people to get angry on the phone and bully credit card companies into increasing their credit limit [to buy more supplies] because ‘that’s what winners do,’” says Henderson. “But they’ll take your last $1,000, or make you buy all sorts of things you never needed to do the job.” He notes that an employee should never be asked to put his or her own money into a business.